Standard & Poor’s currently gives United States Treasuries a credit rating of “AA+”, just below the maximum AAA credit rating (the other two major ratings agencies, Fitch and Moody’s, still give the U.S. their highest rating). Currently Treasury yields are quite low, possibly reflecting a market view that U.S. debt has little risk, allowing for some stocks with higher credit ratings to pay considerably higher interest rates on their debt or dividend yields on ownership of their stock. Dividend yields and Treasury rates are not purely comparable- companies can cut their dividend payments without defaulting- but in theory the credit rating, as a measurement of how risky a company’s debt is, should also serve as an indicator of how likely it is that a cash crunch will force a dividend cut. Here are five stocks which pay dividend yields of 2.5% or higher and whose debt is rated at least AA+ by Standard & Poor’s:
Standard & Poor’s rates General Electric Company (NYSE:GE) AA+, even with the U.S. government; General Electric Company (NYSE:GE)’s dividend yield is over 3%. While the stock price itself does fluctuate along with market indices (the beta is 1.4) the conglomerate’s diversified business and large size makes its cash flows quite dependable in S&P’s eyes. Quarterly payments were slashed in early 2009, however, and at 19 cents a share are still below what General Electric Company (NYSE:GE) was paying before that time. We’d also note that General Electric Company (NYSE:GE) trades at 17 times trailing earnings, and while net income was up in the first quarter of 2013 versus a year earlier revenue was about flat.
AAA-rated Microsoft Corporation (NASDAQ:MSFT) has risen about 10% in the last two weeks, pulling its dividend yield down to 2.9%. Microsoft Corporation (NASDAQ:MSFT) had been just outside our list of the five most popular stocks among hedge funds in the fourth quarter of 2012; find more stocks hedge funds loved. The stock’s earnings multiples have also risen: for example, the software company is valued at 11 times consensus earnings for the fiscal year ending in June 2014. We would be curious as to how much of those earnings would be a temporary bump coming from the release of new versions of Windows and Office.
Johnson & Johnson (NYSE:JNJ) pays a 2.9% dividend yield- more than 1 full percentage point above Treasuries- and carries a AAA rating from S&P. The drug and personal products manufacturer is a good pick for defensive investors, since its beta is only 0.5 reflecting its stability even in poor economic conditions. Johnson & Johnson (NYSE:JNJ) does look a bit pricy at a trailing P/E of 23, though analysts expect earnings to improve considerably over the next couple of years. Billionaire Ken Fisher’s Fisher Asset Management reported a position of over 10 million shares in Johnson & Johnson (NYSE:JNJ) at the end of December; see Fisher’s favorite stocks.
We also identified oil and gas supermajor Exxon Mobil Corporation (NYSE:XOM) as a fairly safe stock which pays a respectable dividend, with the yield coming out to 2.9% at current prices, and is AAA-rated. Large oil companies are generally trading at low earnings multiples, with Exxon Mobil Corporation (NYSE:XOM)’s forward P/E of 11 actually representing a premium to many of its peers. Of course, while the stock is arguably cheap there is significant commodity risk. The Bill and Melinda Gates Foundation Trust owned 7.6 million shares of Exxon Mobil Corporation (NYSE:XOM) according to its most recent 13F filing; check out more stocks the trust is invested in.
Rounding out our list is Automatic Data Processing (NYSE:ADP), the $33 billion market cap business services company perhaps best known for administering payroll and other HR functions. It is rated AAA, and while Automatic Data Processing (NYSE:ADP)’s dividend yield is lower than the other companies we’ve discussed here it is still fairly generous at 2.6%. However, the stock does not look like a good value to us: the trailing and forward earnings multiples are both above 20, and in its most recent quarterly report (from the quarter ending in December, the second quarter of Automatic Data Processing (NYSE:ADP)’s fiscal year) revenue and earnings only saw moderate increases.
Disclosure: I own no shares of any stocks mentioned in this article.
